Some property investors make the mistake of not calculating how much their property manager’s letting fees could be costing them. Don’t be one of them!
But how do letting fees cost me? They’re paid by tenants!
Even though letting fees are paid by tenants, there’s a hidden cost to you.
This cost is best explained with an example:
Examples of the hidden cost to you with letting fees
Let’s look at these using a $300 week rent; 8.0% property management fee; and $300 letting fee…
Property Manager A: Lets property for 44 weeks (2 x 4 week vacancies and 2 tenancies):
– Property Manager’s income: $1056 management fee + $600 letting fee = $1,656
– Your income (net of the management fee): $12,144
Property Manager B: Lets property for 48 weeks (4 week vacancy and 1 tenancy):
– Property Manager’s income: $1,152 management fee + $300 letting fee = $1,452
– Your income (net of the management fee): $13,248
Bridgman Property Management: Lets the property for 52 weeks to one tenant:
– Property Manager’s income: $1,248 management fee + zero letting fee = $1,248
– Your income (net of the management fee): $14,352
These examples are indicative only and do not infer any guarantees on rental income or profitability. And for simplicity, GST has been excluded.
They do, however, show that what’s good for you isn’t the most profitable outcome for a property manager!
What can we learn from this example?
There are three important things you can learn from this example:
1. The property manager makes more income when there’s a letting fee in place
That financial incentive means that there’s likely to be a higher tenant turnover rate, and that the property will be vacant more often. Simply put, the property manager’s income increases with an increasing tenant turnover.
2. Your income decreases when there’s a letting fee in place
More vacancies equal a loss of income… simple! With an increasing tenant turnover, the property owner’s net income is decreasing while the Property Manager’s income is increasing.
3. What’s in the property manager’s best financial interests isn’t necessarily in your best financial interests
There’s a distinct conflict of interest here. Many property investors assume that the property manager is there to work for them, but that isn’t necessarily true, as the above example shows. (And it’s one we’ve seen in action many, many times.)
How to avoid this conflict of interest
Avoiding this conflict of interest is simple – make sure you choose a property manager who doesn’t charge a letting fee!
So when you’re interviewing potential property managers, be sure to ask them about ALL their fees – not just how much their management fee is. There are other factors, such as letting fees, which have a far greater impact on your property’s profitability than management fees!
It’s best to find out this important information up-front, rather than later on, when you could potentially be paying rates, insurance and mortgage interest on a vacant property, time after time.
As well as having a direct financial impact, letting fees also create disloyalty and affect the relationship between the property manager and property investor. Find out more →